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The Income-producing Family Foundation
An income-producing family foundation,
also known as a charitable remainder trust, is perhaps one of the most
intelligent investment and estate planning strategies available today.
That’s because it enables you to avoid capital gains taxes on the
sale of appreciated property; enjoy an income tax deduction; convert highly
appreciated, nonperforming assets into an income stream; reduce estate
taxes; and diversify your investment portfolio. Establishing an income-producing
family foundation also allows you to perpetuate your values through the
distribution of the remainder to charitable causes.
How income-producing family foundations work
- You transfer highly appreciated assets to a trust,
which is administered by a trustee. The trustee can be you, a charity
or a corporate trustee, such as a bank. The trustee sells the asset
at full market value and does not have to pay capital gains taxes because
the trust is tax-exempt. The trustee reinvests the proceeds of the sale
in assets that produce income.
- For the rest of your life, you will receive income or
a “payout” from the trust’s assets. Depending on whether
you establish a unitrust or an annuity trust, the income/payout you
receive can be in the form of a fixed percentage of the trust’s
assets valued annually or a fixed payment. For annuity trusts, the IRS
requires that the payout rate cannot be less than 5% of the initial
fair market value of the trust’s assets. For unitrusts, the payout
cannot be less than 5% of the net fair market value of the trust assets
valued annually.
- You are entitled to a charitable income tax deduction
in the year of the transfer. The deduction is based on the fair market
value of the asset, the payout percentage, your age and the applicable
federal rate. If you are unable to use the entire charitable deduction
in the year of the transfer, the deduction can be carried over for the
next five years.
- At the conclusion of your life, your estate pays no taxes on the trust assets that are transferred to a charity.
After setting up a CRT, you can establish an ILIT that replaces the asset used to fund the CRT. The avoidance of capital gains tax, the charitable deduction and the increased income combine to help pay for the insurance premiums. Upon the conclusion of your life, your heirs receive a substantial death benefit free from probate and estate and income taxes.
Several types of assets can be eligible for transfer into an income-producing family foundation, including cash, publicly traded securities, closely held stock, and investment real estate.
If you wish to explore how an Income-Producing Family Foundation can work for you, just call us at 510-428-3363, and we will provide you with a confidential illustration of the estimated tax and income benefits.
* THIS IS NOT LEGAL ADVICE. ANY PROSPECTIVE DONOR SHOULD SEEK THE ADVICE OF A QUALIFIED LEGAL, ESTATE AND/OR TAX PROFESSIONAL TO DETERMINE THE CONSEQUENCES OF HIS/HER GIFT.
